Will US regulators lower Forex leverage even further in wake of Swiss Franc spike?


It was perhaps inevitable that in the aftermath of last Thursday’s high levels of volatility which affected the Swiss franc against other major currencies would lead to regulatory review.

The effect which the Swiss National Bank’s decision to remove the 1.20 price floor on the EURCHF pair had on the FX industry was dramatic and instantaneous, ranging from negative client balances to firms having to declare insolvency.

Today, a report by Reuters indicates that the US National Futures Association (NFA) may change its rules for how much leverage retail clients trading currencies can take on, a spokeswoman said on Tuesday, after last week’s emergency rescue of broker FXCM .

The report explained that Chicago-based NFA, which oversees the trading of retail foreign exchange products, said any chances would be to make sure that its leverage requirements were in line with those of exchanges that trade currency products.

“Any changes to our rules do require board approval. NFA’s next board meeting is Feb. 19,” the spokeswoman said in an emailed statement.

Shares in retail currency broker FXCM lost two-thirds of their value on Tuesday as the company laid out details of a rescue loan after $200 million of losses on last week’s shock removal of the cap on the Swiss franc.

To emphasize this possibilty further, the Wall Street Journal spoke to NFA  Strategy and Communications officer Karen Wuertz, who confirmed that the NFA is indeed considering whether to alter a cap on borrowed money, or leverage, for currency bets in response to last week’s market tumult.

The NFA and Commodity Futures Trading Commission (CFTC) rules cap leverage at 50 to 1 on major currencies like the franc, meaning an investor putting up $1,000 could borrow as much as $50,000. It was unclear Tuesday if the CFTC, which oversees the futures association, would revisit its leverage caps as well. The agencies have two separate sets of leverage rules that mirror each other. A spokesman for the CFTC didn’t respond to a request for comment.

Any changes to the future association’s leverage rules, which its board plans to discuss on February 19, would be aimed at ensuring they are consistent with those at exchanges that trade similar foreign-exchange products, Ms. Wuertz said. The self-regulator is working on an analysis and didn’t have any conclusions to share publicly Tuesday, she said.

Many brokerages across the global FX industry have taken measures to reduce leverage to 1:10, with Switzerland’s Dukascopy Bank, and retail FX stalwart FxPro being two notable examples, thus the effect of an event such as that of last Thursday may be one which not only changes the landscape of the corporate aspects of the FX industry, but of the regulatory aspects too.

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Will US regulators lower Forex leverage even further in wake of Swiss Franc spike?

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